Show the impact of a tax on cigarette producers

1. There are six potential consumers of computer games, each willing to buy only one game. Consumer 1 is willing to pay $40 for one game, consumer 2 is willing to pay $35, consumer 3 is willing to pay $30, consumer 4 is willing to pay $25, consumer 6 is willing to pay $20, and consumer 6 is willing to pay $15.

a) Suppose the market price for games is $29, what is total consumer surplus

b) If the market price decreases to $19, what is total consumer surplus

2. Provide a detailed diagram and complete explanation illustrating the relationship between price elasticity of demand and total revenue for a given straight line demand curve.

3. It is commonly believed that cigarette smokers have a relatively price inelastic demand for cigarettes. Create a well-labeled diagram showing the demand for cigarettes and the supply of cigarettes where the supply curve is relatively more price elastic than the demand.

a) show the impact of a tax on cigarette producers

b) show the tax “wedge” and identify the price sellers receive and the price consumers pay for cigarettes.

c) which side of the market bears more of the burden of this tax? Why?

4. Compute the price elasticity of demand between the following price and quantities using the midpoint formula: P1 = 4.00 Qd1 = 1000 units, P2 = 3.90 Qd2 = 1050. Is the demand price elastic or price inelastic in this range? How do you know? What information would you need to determine if this good is a normal or inferior good?

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